Personal guarantees have role to play with LRBAs


Per Amundsen

Calls to prohibit the use of personal guarantees to support limited recourse borrowing arrangements (LRBAs) fail to understand this is common practice with almost all lending to small businesses, says Per Amundsen, Head of Research, at the specialist commercial property lender Thinktank.

Amundsen says: “The reasoning behind this practice is quite simple – the ultimate beneficiaries are those individuals whose guarantees are sought.

“Guarantees used to support LRBAs are specifically provided for in the SIS Act and ensure that their recourse to other SMSF assets is no less limited than the original lender, and if funds are provided as a source of repayment these are then deemed to be contributions to the SMSF.”

LRBAs have remained in the spotlight since their introduction in 2007. The Financial System Inquiry (2014) recommended their abolition as did the Council of Financial Regulators in its February 2019 report. At the last election, it was Labor Party policy to abolish LRBAs. To date, the Government has resisted all recommendations to end SMSF borrowing, although it wants another review in three years.

Amundsen says: “Although the Council of Financial Regulators did recommend banning LRBAs, and if that proposal were not adopted to prohibit the use of personal guarantees to support LRBAs, its report still concluded that LRBAs posed no systemic risk to the superannuation system.

“This is hardly surprising. The fact that real property investment represents only a relatively small proportion of total SMSF assets – 14.3 per cent as at March 2019 – compared with 56.7 per cent for cash, deposits and listed shares and trusts. Real property investment is broken down to 4.9 per cent residential and 9.4 per cent non-residential.

“In the February 2019 CFR report, non-residential real property made up 46 per cent of that supported by LRBAs and is known as ‘business real property’ when used ‘wholly and exclusively’ for business purposes.

“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them. The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.”

Amundsen says: “The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses.

“The ATO’s efforts with respect to Investment Strategies and the late submission of Annual Returns is a great start to this as are ASIC’s enforcement actions in recognition of failings by licensed advisers and others who owe a duty of care to trustees and members.”

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